"It pays to analyse what the Smart Money are doing."
Sometimes the smart money gets it wrong too, and its better to consider the big picture.
The three big problems for the Fed are 1) the inflation problem, 2) the bank problem 3) the debt problem.
All these problems go away if inflation and interest rates go back to 2%. So, this is the top priority for the fed.
Hiking rates will make the bank problem much worse. It also only tightens spending for the lower 1/3 income earners. If the stock market is up, the top 2/3 income earners will be cashed up and will continue to spend, spend, spend. Consequently, the fed has to get the stock market down enough so that the top 2/3 income earners also clam up on their spending.
There are two headwinds that make the feds job of getting to the 2% target much harder. 1) shortage of skilled workers 2) high oil price. We are not sure why Russia & Saudi Arabia are deliberately restricting oil supply? But it could be part of a master plan - meaning they are not going to stop any time soon. The way Powell was behaving last week, suggests that this is correct and a soft landing is off the cards and a recession is now necessary.
So, how much will they have to squeeze the economy (and demand for oil) to get prices back down? What if Russia & Saudi Arabia dont play ball and continue to cut supply? Maybe this is why Powell seemed so worried and why the "higher for longer" mantra continues?
Also, this is a Democrat majority Fed. So they are going to want the recession done and the 2% target reached before the next election in 2024. So, no way can they afford to let the market rally. They will want the bear market and recession started asap even if the sledge hammer is needed.
The chart below shows the S&P500 and the 200ma going back to the GFC. The red regions are 20% corrections (from peak to trough).
Given the headwinds and the fed's need to get the market down and the demand for oil down, another bear market red zone seems inevitable and we can expect the S&P500 bottom to be about 3500 and 9-12mths away. If we get a banking crisis or another war, 40-50% correction is on the cards.
(20min delay)